Employees often have a choice: A tax trap threatens when a lump sum is paid out from a company pension

More than 20 million employees in Germany have occupational retirement provisions, according to statistics from the Federal Ministry for Labor and Social Affairs. Upon retirement, many individuals face choices regarding the distribution of the accumulated capital. This capital can be paid out in full or partially, or on a monthly basis as an occupational pension.

Choosing to receive a portion of this capital poses significant tax considerations, the Federal Association of Tax Relief Associations (BVL) warns. A lump sum payment from a direct insurance, pension fund or pension scheme can lead to substantial tax liabilities. "The capital distribution is fully included in the taxable income for the respective year," explains BVL Managing Director Jana Bauer.

"This can significantly increase one's personal tax rate compared to receiving a monthly pension." Tax evaluation can assist in decision-making. In principle, occupational retirement provisions are taxed in full if contributions were tax-free during the saving phase, such as via salary conversion from gross wages. But in the cases of direct insurance, pension funds and pension funds, it is often the case that the payout is tax-free.

However, only if contributions during the saving phase were made from taxable income, the payout is generally tax-free. Employees seeking to terminate their occupational retirement provision by capital distribution should calculate beforehand how much net remains from the gross, the BVL advises. They should compare this to the option of monthly occupational pension and decide which option suits them better. Tax advisors and tax relief associations can help with the assessment.